Lots of folks seem to think that a US Airways acquisition of American is a done deal, going to happen, here’s one example of a guess that it’s even announced today.

Allow me to offer a contrary view.

I believe that US Airways wants to acquire American. They want it too badly that they’ll overpay to accomplish it.

But the best scenario for US Airways is to attempt to acquire American and fail, because they’ll hobble American in the process.

And the dance with US Airways benefits the unions, and American’s competitors, because it prevents American from achieving the cost savings they’re looking for.

First, a US Airways acquisition will not come today. American currently has the exclusive right to reorganize through September 28. The Unsecured Creditors Committee can ask the bankruptcy court to terminate that right, which would be a precondition for any deal prior to September. The unions, holding 3 of 9 seats on that committee, would presumably be a swing vote. Courting that group is an important strategy for US Airways to do a deal, but that deal will not happen today, the creditors committee first has to vote and then go to the court for a hearing. And there’s a big difference between union support through a press release and actually calling for a vote.

Second, there’s a lot of commentary out there about how great a management US Airways has and how that management would improve American. But doing a deal with American’s unions would presumably mean higher labor costs than what the airline could achieve through the bankruptcy process. That doesn’t make the airline more profitable, or reorganizing the airline better for non-union unsecured creditors.

A more generous deal with American’s unions than those unions could get from American management doesn’t just mean higher labor costs for American, it means higher labor costs for the existing US Airways operation as well since presumably the integration of the workforce would mean operating under more expensive contracts. That’s not just bad for American Airlines, it is bad or US Airways as well.

On the other hand, American’s labor unions are shrewd for announcing a deal — it suggests that ‘the industry’ (as represented by US Airways) doesn’t believe that the lower labor costs that American will be asking the bankruptcy court to impose are actually necessary. That makes it harder for American management to impose labor terms through the courts.

And throwing their weight behind a deal with US Airways is the ultimate hardball card that the unions can play against management. American management has been pushing for deep costs cuts, this action says there’s a limit to how far American management can go without losing control of the process. American’s management probably won’t back down, except to the extent they don’t see themselves prevailing in court, it’s certainly tough to develop better collaborative labor relations between current management and union leadership (though that likely wasn’t in the cards anyway).

From US Airways’ perspective, and while I believe they want to acquire American so much so that they’ll raise their costs too high to remain competitive, the best thing that could happen for US Airways could well be to play footsie with an acquisition, prevent American from cutting costs through the bankruptcy process as much as they’d otherwise be able to, and see an independent American emerge from bankruptcy too weak to prosper, at a continuing cost disadvantage.

Cranky Fliermakes the strong case for acquisition, claiming that the combined airline not just has the ‘better’ US Airways management but also a stronger route network. They can promise growth rather than contraction.

I don’t buy it — there’s too much duplication between Philadelphia (US Airways) and New York JFK (American), between Los Angeles (American) and Phoenix (US Airways), and between Miami (American) and Charlotte (US Airways) – at least for the Caribbean routes. A combined airline will shrink more than the two airlines operating separately.

I also don’t buy that it’s such a no-brainer that US Airways can win the support of the creditors committee to terminate American management’s exclusivity that’s set to run through September 28.

The current committee is 3 union representatives, the Pension Benefit Guarantee Corporation, Boeing, Hewlett-Packard, and 3 trustees for unsecured bondholders.

US Airways can presumably bid up what the bondholders receive and offer a better pension deal reducing the PBGC’s liability. So that’s 4 votes.

Cranky thinks that Boeing would support US Airways if US Airways re-affirms American aircraft orders on the books. But American buys Boeing, US Airways buys Airbus, it’s not so obvious that Boeing can be bought so easily, Boeing probably sees their future sales stream as stronger with an independent American. The diverse fleet issue is also a big problem for a combined American-US Airways since it means higher costs for pilots, training, maintenance — higher than either airline has currently, and another reason why a merger isn’t such an obvious improvement on the cost side.

Cranky also thinks that Hewlett-Packard goes with US Airways because US Airways uses an HP reservations product. But American is hundreds of millions in future investment away from also using an HP product, and Ameircan-Sabre’s unpleasant litigation makes it all the more likely that an independent American means two rather than just one HP customer. With HP as an important creditors committee vote, American isn’t likely to pull out anyway. HP benefits from two customers more than one and so shouldn’t obviously support US Airways here.

Still, the unions become a swing vote on the creditors committee. They have an extremely powerful card to play, but that they’re playing it in public rather than simply calling for a vote and petitioning the Court says that they’re looking for leverage rather than to give Doug Parker a quick deal.

In the end, US Airways is bidding up American’s costs, and American management could be boxed into obliging to avoid losing control of the company. Whichever group comes out on top, they’re likely to overbid and wind up with an American that has higher costs than it would have otherwise had out of a bankruptcy process. Which jeopardizes the airline as a going concern. My fear in all of this is that a successful transaction could jeopardize both American and US Airways when the latter airline inherits those high costs.

Related

just heard that AA is outsourcing almost all of its baggage/ticketing agents except for 12 or 13 airports. Even SFO is gonna get outsourced. Like who is gonna do the outsourcing? Its not like europe where you already have this going on. Oh well, there goes the cus service.
USair, maybe others have had better outcomes, but their cs is amongst the worst. Star alliance status means nothing to their agents in my experience.

Steve Schwartz said,

Excellent analysis. That’s why I read you every day!

TheYguy said,

It seems to me that AA can still claim that they need to cut labor costs tremendously even with the US bid. Why? US Air’s labor CASM is one of the lowest in the industry, I think only G4 and NK have lower. The other feather in AA management’s cap is that US Air and America West haven’t merged their unions.

The clear merger partner for AA is AS, problem is, AS isn’t looking for the headache from a huge buyout of AMR. What would they do with all those MD80s? Labor contracts? Eagle? – It’s a mess.

bluto said,

The creditor’s committee is not going to ask to terminate plan exclusivity anytime soon. It is really rare for bankruptcy judges to terminate the debtor’s plan exclusivity this early, and any motion by the committee to get that would have a low probability of success. The committee’s lawyers know that and would not advise that as a strategy just yet.

With that said, the termination of exclusivity isn’t really a precondition for the merger. US Air only needs to get the debtor to agree on a merger. I know Horton has said publicly he doesn’t prefer a merger before emerging from bankruptcy, but I’ve seen enough bankruptcies and mergers to know that these deals sometimes come together despite players’ public statements indicating otherwise.

I agree overall, though, that a deal right now would be a longshot. I think AMR’s best course is to proceed with this 1113 motion to restructure labor contracts, emerge from bankruptcy with a plan of their own, and then pursue a merger after they’ve restructured their own costs.

Marc said,

You forgot one important part.. how this affects us mileage junkies. Although I’m guessing no matter what, it’ll end up as another devaluation for us. I really hate this hobby sometimes. :/

@Marc didn’t forget that, have mentioned elsewhere and not so much the point of THIS post. But confident a combined airline will be called American and part of oneworld. Miles will combine. The American chart isn’t generally cheaper than the US Airways chart, we probably don’t see much award cost inflation for awhile. We either keep American’s domestic upgrade scheme or go all complimentary upgrades. The one thing probably at risk is the 8 international eVIPs. And the route network. I don’t see all the hubs remaining.

Jason H said,

I posted it as a reply to you on Cranky’s site and I’ll say it here too. I think ‘fleet commonality’ is a red herring. Case in point is Delta. An airline that I think flies more aircraft types than you can shake an aircraft marshaling baton at and yet still is making decent money. It’s not always about commonality, but how those aircraft are deployed.

@bluto I absolutely agree, when I posted it I realized the one caveat I did not offer is that a deal o course could be VOLUNTARY between AA and US. But clearly US is working the “go around management and box them in approach” so my sense is there’ll be a lot of bluster before any willing deal could be done. Management won’t want a deal where they lose their jobs (no question Parker and crew will be in charge). So they’ll have to see all their options disappear first I’d imagine.

@Jason H just another mechanism by which they’ll have higher and higher costs Not the major or controlling reason.

Carl said,

oh isnt great – There’s no shortage of people who can handle ticketing/baggage/gate agent duties. Regional airlines can do it. Delta has an operation that does it. Companies like Swissport, Menzies etc.
Not saying it’s a great customer experience. But as an example many of Alaska’s stations are outsourced.

Carl said,

Gary – I think US Air has nothing to lose in making this bid. If they fail, as you note, then a weaker American emerges, whether it’s because it has dragged out the process or increased American’s costs. But US Air can offer more to creditors than a standalone American, because it will have more to cut, because there is an opportunity for more network revenue, and because it has a more creative management. Despite Parker’s promises don’t think for a moment that he won’t be taking a scalpel to the combined airline, and over time those promises weaken anyway. Parker will be ruthless in eliminating operations that aren’t profitable. If Phoenix and LAX overlap, PHX may experience what LAS did (they are talking of moving HQ from Tempe to Ft Worth already). If NYC and PHL overlap, and NYC isn’t profitable, maybe PHL is the primary east coast transatlantic hub, and only profitable O/D traffic remains in NYC. NYC is a difficult hub anyway because of LGA vs. JFK.

US Air doesn’t have to hurry this thing or demand that AA’s management exclusive period needs to be cut off. They can win by throwing in the wrench – but they can also likely win by building a single improved airline out of the parts.

At the end of the day, I expect US Air to make a credible offer – but it won’t end up as great for AA’s unions as they hope.

Let us not forget – another bidder can always emerge, US might be bumping up that buyer’s cost by being first-mover. Also that US Airways ticker symbol is LCC. Inquiring minds want to know whether that’s an acronym for “Low Cost Carrier”

Thank you for another great post, your in-depth analysis provides a type of nuts and bolts information that many other bloggers just are not able to create or have capability to publish.

All the best,

PedroNY

Kelly Henry said,

Longtime reader – first time poster. As a former Airline exec and current mileage junkie (>4mil AA miles at this moment) – I’m watching the AA bankruptcy closely. Unions were smart to make an alliance but as you point out – an alliance is NOT a union vote. US has enough problems with their existing unions – they still have not merged AW and US pilots! AA unions are just playing hardball – US and AA merger will most certainly not happen! How about this tho – AA and AS – both Boeing customers, little hub overlap (SEA vs ORD, DFW, MIA, LAX, JFK). 3. AS is already a oneworld partner…. Just saying.

Steven S said,

If NYC and PHL overlap, and NYC isn’t profitable, maybe PHL is the primary east coast transatlantic hub, and only profitable O/D traffic remains in NYC. NYC is a difficult hub anyway because of LGA vs. JFK.

Please tell me you’re kidding. Do you really thing the only OneWorld American carrier would forego NYC? Really? Can you imagine telling all those people that they now have to fly into Philadelphia???

No idea where this is going but that idea has to be a non-starter!

Rich A said,

If it comes to it, better U.S. Airways than Delta.

Craig said,

An interesting aspect if this did occur would be: What would become of ‘One World’ without the US

[…] And now, the unions are pushing for a mid-bankruptcy election, holding American hostage to union – not workers’ and certainly not American’s – interests. Industry experts have recently stepped up to question whether the merger should even happen, given how bad the deal seems … […]

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